By Christoph Zott, professor of entrepreneurship at IESE Business School
The pandemic has brought so much to a halt: travel, economic growth and pre-pandemic-style socializing, to name a few.
Yet, the restrictions in place to protect public health need not limit business leaders’ imaginations. In fact, this is a prime time for business model innovation and new approaches to value creation. Microsoft CEO Satya Nadella said as much this spring when he told investors, “We’ve seen two years’ worth of digital transformation in two months.” The company moved decisively through global panic: between March and June 2020 alone, it made five acquisitions to expand its cloud computing empire.
So, should some supply chains be shorter? Can effective training happen via videoconferencing? Will older customers embrace online banking as fully as millennials? The short answer seems to be yes, and that carries long-range ramifications for current business models and the assumptions that underpin them.
Here are a few practical insights culled from research into business model innovation and entrepreneurs who’ve seen its benefits:
Properly define what a business model is—and isn’t. A business model, in a nutshell, is how a firm should do business and, therefore, one of the fundamental strategic issues a firm faces. During the dot-com boom, internet entrepreneurs were rewarded for their adaptability, but much of that innovation blurred the border with imagination and many of their wild ideas never turned profitable, leading to the dot-com bust.
Those techies had plenty of strategies, but they lacked viable business models. This made failures inevitable, since radical changes to a company’s business model have immense performance implications. Indeed, a recent study of 917 retail companies by my colleague Govert Vroom found that the business model accounts for 5.1% of a firm’s return on investment, after controlling for other factors.
Know the model’s inner workings. One technical way to define a business model is as a boundary-spanning system of interdependent activities that centers on a focal firm, yet may encompass activities performed by its partners, suppliers and customers in the pursuit of value creation and capture. Embedded in that definition are some key features like “boundary-spanning” and “partnerships.”
To bring that definition down to earth a bit, here are four deceptively simple dimensions of every business model, and four related questions to ask yourself about your own:
- What: Its content. What are the activities that encompass my business model?
- How: Its structure. How are these activities linked, both the sequencing of the activities and the exchange mechanisms among them?
- Who: Its governance. Who performs the activities, i.e., which activities are performed by my firm versus those performed by our partners, suppliers or customers?
- Why: Its value logic. Why does my business model create value, and why does it enhance value appropriation?
These four dimensions are often highly interdependent. And making innovative changes in several of them is when things start to get really interesting.
It’s important to understand that valuable business model innovation does not arise from simply operating more efficiently or offering shiny new products or services.
To gain from business model innovation, focus on how it:
- Complements other forms of innovation with the goal of creating synergies. Apple is famously successful here, as customers wooed by the latest iPhone innovations, for instance, will stay loyal to the Company because of the app store or iTunes, both of which are important business model innovations.
- Guards against imitation. When service or product innovations are embedded in a novel business model, competition will have a harder time playing copycat.
- Disrupts an industry by creating brand new markets and/or uncovers fresh opportunities within established ones.
Business model innovation is a complex process, and one that’s often misunderstood or overlooked. But when done correctly, it’s an effective way to reposition your company and to let how you function dictate superior results.